Sky Germany gets bank warning

Sky Deutschland has just had another cash injection from News Corp which now controls almost 50 per cent of the pay-TV company, although Sky Deutschland is still seeking additional liquidity. News Corp says it will not absorb more than its current 49.9 per cent shareholding. Investment bankers Morgan Stanley, in a note to clients, say that the fundraising provides room for CEO Brian Sullivan to have “another go” at kicking extra life into the company’s prospects.

“Sky Deutschland has its third CEO in three years with Brian Sullivan. His challenge remains the same as that of his predecessors. It is to create the marketing and product proposition that will persuade the hitherto reluctant German consumer to buy Sky’s pay TV services. The [planned] €340 million fund raising gives the company more breathing space to carry out its fresh initiatives without imminent fear of breaching banking covenants,” said the bank.

The bank’s note praises Brian Sullivan, who “has moved quickly to address service issues, to improve the product offering with HD and a new satellite PVR and to build new alliances with some of the cable operators. Many of these initiatives have been carried out successfully in other News pay TV businesses. With financial backing from NewsCorp, energetic new management and a stream of initiatives, the company is certainly giving itself a chance.”

However, the bank’s bottom line is not optimistic. If Sullivan fails then “there’s very little value in the shares” says Morgan Stanley. The subscriber proposition “is not yet proven” they add, saying that despite the name change and €100m+ spent of marketing the new look and offer, as well as the Bundesliga soccer rights, progress has been painfully slow.

Indeed, the bank pulls no punches saying that there are still obstacles to be overcome, which the report lists as:

i) The German consumer is notably frugal and a mass market for premium pay TV is yet to develop, mirroring previous history of premium pay TV in Germany;

ii) Sky is launching at a time of relative strain for the German consumer;

iii) There is competition from DT with IPTV Bundesliga;

iv) The cable operators in Germany and DT have developed triple play packages not offered by Sky;

v) Sky suffered execution issues in H2 2009;

vi) Sky is working through high churn due to a residue of low paying subscribers in the base.

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